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Jul 22, 2020

Navigating State Compliance Requirements in a Virtual World
David Brandon and Max Forer, Miller Nash Graham & Dunn

Although COVID-19 had been circulating for months, its impact wasn’t felt by many Americans until shelter-in-place orders went into effect in mid-March 2020. Some of the initial effects of these shelter-in-place and remote work orders were somewhat baffling–toilet paper shortages, for example–as Americans adjusted to the “new normal.” The delayed effects of the continued COVID crisis can be equally baffling, but for entirely different reasons. As the COVID crisis continues, the business landscape is changing. The remote location of workers, and by extension, consumers and businesses, has raised new questions for when businesses must register to do business, submit to the jurisdiction of courts, and pay taxes in new states. As companies cross geographic and virtual borders, accurately answering these questions is more important than ever, because what you don’t know can hurt you. 

Registration Requirements

Each state has a registration requirement for companies doing business in the state, but the question is really what level of activity triggers registration? Generally, there are five signs that registration is required:

  1. physical presence in the state;
  2. employing employees in the state;
  3. entering contracts with people in the state;
  4. regularly holding in-person meetings with customers in the state; and
  5. deriving significant revenue from activities in the state.

Companies can be penalized for transacting business in a state without registration. Often, a fine is imposed (for example, Arizona requires payment of all unpaid fees, plus a penalty of up to $1,000), and under some state statutes, even the people doing business on behalf of the non-complying company can be fined too (California can charge an “agent” of the company with a misdemeanor punishable by fines of $50 to $600).

Additionally, states can prevent unregistered companies from bringing a suit in state courts. These “door closing” provisions stop unregistered companies from benefitting from the aid of a state’s courts in enforcing its rights while it violates state law.

Even if already registered in a state, companies may be “administratively dissolved” for failure to pay periodic registration fees. This can often be fixed by paying the past-due registration fee(s) and (typically) a late fee. Although resolving an administrative dissolution is better late than never, delay will usually result in greater remedial fees.

Jurisdictional Considerations

As a general rule, state courts will not exercise jurisdiction over out-of-state businesses unless such businesses have enough of a connection (or “minimum contacts”) to the state to justify bringing the business into court in the state. We usually think of minimum contacts as being established by having a physical presence (such as employees) in the state, or by entering contracts with or selling goods or services to state residents. As a result, it is more important than ever for companies to track where their consumer and business customers (and their employees) are physically located, and where their own employees are located, lest the company become subject to a lawsuit in another state by virtue of having employees in, or making sales into the state.

Tax Consequences

Generally speaking, if a company maintains a physical presence in a state, the company will become subject to state income and sales taxes. A federal law known as PL 86-272 broadly limits the states’ ability to impose income tax where soliciting sales is the taxpayer’s only activity in the state. So, a remote sales-force is not likely to trigger an income tax obligation, but maintaining a remote workforce (for example, developers, marketing, or general administration workers) in a state may subject a business to that state’s income tax and sales tax laws.

Even if a business is not subject to income tax in a state, businesses should be aware of potential changes in the way their income is apportioned, or divided, among states. For example, if a remote work mandate causes a business’s employees to leave state A, and state A uses an apportionment methodology relying on the ratio of the taxpayer’s total property and payroll used in state A, the taxpayer’s tax burden in state A may decrease. Alternatively, if the apportionment methodology looks only to the source of revenue, the location of the business’s employees may not matter, while the location of its client base will be the determining factor.


We hope that eventually, COVID-19 will be a distant memory, but what companies do now to adapt will position them to endure. It is extremely important that companies understand the corporate, jurisdictional, and tax regimes to which they are subject and take thoughtful action to structure their remote workforce and client development initiatives accordingly.

David Brandon, a partner of Miller Nash Graham & Dunn, is a tax and business attorney whose practice focuses on the tax consequences of significant events and transactions undertaken by for-profit and nonprofit organizations. David regularly advises on entity choice, formation, and governance matters, obtaining federal tax-exempt status for nonprofit corporations, sales and acquisitions of businesses, and domestic and cross-border transactions. Contact him at 503-205-2372 or

Max Forer is an attorney with Miller Nash Graham & Dunn. He focuses his practice on a wide variety of corporate and real estate matters, including mergers and acquisitions, corporate finance, real estate financing, commercial leasing, commercial landlord-tenant disputes, and corporate governance matters. Contact him at 503-205-2473 or

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